I work with a lot of operators opening a new coworking location, many for the first time, and one of the things we focus on together is the revenue projections. They are hard to get exactly right, but they are critical, because you need a plan to push toward and metrics you hold yourself against that tell you whether you are on track. They also line up with the expenses coming your way, so they tell you when you have to be able to pay full rent.
One of the challenges of opening a coworking space is that you carry close to full costs while you do not have full occupancy, and getting to stabilized occupancy can take 18 months depending on the market and the size of the location. Many of those fixed costs hit from day one, and hopefully rent is not one of them, because one of the best concessions you can negotiate into your lease is a long free-rent period that gives you time to ramp your occupancy before full rent starts. Without that free-rent period, you need an excessive amount of working capital to pay rent while you are ramping.
New operators are usually too optimistic about how fast occupancy will ramp, but experienced operators know a ramp-up period is hard to accelerate. It takes a certain amount of time, a certain number of levers pulled, and a lot of hustling to figure out that particular market. So if you are brand new, recalibrate constantly against what your actuals are, what you projected, and how far you still are from covering full rent, full staff, a paycheck for yourself, and debt service payments.
Revenue gets off track easily in the months before you reach stabilized occupancy, and one of the fastest ways it happens is discounting. There are two strategies that keep revenue on track while you fill the space. The first is to plan and limit your discounting, and the second is to build three revenue streams at the same time rather than one after another.
Both come up mostly with brand new operators, though an experienced operator opening a much larger second location can get off track on them, too. This article is the written companion to this episode of the Everything Coworking podcast, where I covered both.
Strategy one: plan and limit your discounting
I often see operators assume they will need to discount when they open, or run specials, which I lump in with discounting: free months, a percentage off, that kind of thing. I caution operators against leading with that out of the gate.
Start with the question of whether you need to discount at all. Then, for whatever discounting you do decide to do, plan and forecast it, so that you stay true to your projection and know where you stand against being able to pay your full expenses.
When you generally do not need to discount
- You are creating much needed supply. If you have done your homework and the operators in your area are already at capacity, lead with bonuses instead of price: a founder’s launch, founding member specials, perks for joining early.
- You have a differentiated brand. Premium brands like Kiln and Malin have design, hospitality, experience, and amenities that set them apart, so on a positioning matrix they sit by themselves rather than next to a competitor. They do not need to discount, and they are not marketing to a customer who walks in expecting to haggle over the price of an office.
- You have limited inventory. With 10 to 15 offices priced appropriately for the market, you have enough scarcity built in that you should not have to discount, even against a lot of competition. The exception is if you mispriced the offices from the beginning.
- Your closest competitor is nearly full. If the operator closest to you in geography and brand positioning has very few offices left, you should not need to discount out of the gate.
To know which of those situations you are in, you have to be in touch with your closest competitors: how you are positioned against them, and what they are offering. What tips the comparison in your favor can be something very simple.
One of my clients is not super premium, but they are very well positioned, and they do not charge for parking or for coffee. Their competitor charges for both. They market that difference locally with great success, and they are winning on a number of things: a fabulous team, a beautiful space, and a couple of differentiators that people in that market really care about.
When you might need to discount
If you find you have to discount heavily, you may simply be priced higher than the market will bear. If that is a forever issue rather than something specific to the launch, what you need to rethink is the business model and how it will create the revenue you need to cover your costs and make a profit.
You might need to discount when your market suddenly has more supply than you planned for, because competitors opened at the same pace you did. I have a client in exactly that position, with a big competitor opening a couple of blocks away, and they are working out what their strategy should be.
Sometimes the right response is to hold your pricing, because you cannot compete with a national operator on price. IWG is probably the biggest discounter you will see in your market, and its corporate financial structure gives it flexibility you do not have. Doubling down on what makes you special and keeping your rates where they are absolutely can work, though you may have to accept a slower ramp rather than racing to the bottom.
You may also need to adjust your pricing when you are not closing deals. If your sales funnel and lead management systems are strong and you are still not closing, the reason can be something other than price, like product market fit. But if you believe those pieces are in place and your team is convinced it is pricing, start testing short-term discounts and free months that you deliver in year one and then remove as you gain occupancy.
You might also discount if you simply value cash flow over everything else. That happens when you are feeling a little desperate, which is a real possibility when rent is due and your fixed expenses arrive whether or not the offices are full, and at that point any revenue is better than none. While you are in that stretch, spend the time to dig deep on your market, your competition, and your differentiation, so that you can get yourself out of the discounting mindset.
Closely related is feeling stalled and needing to create some momentum. Ramping a large location is hard, and if you have 70 offices to fill, the space looks empty for a long time even when you are ramping on schedule. You are selling a few offices a month and getting there, and it still feels quiet, so people tour, see no urgency and no scarcity, and ask for a deal, because with that much vacancy you will obviously take it.
That is tough to overcome.
So sometimes you need temporary specials to get people in the door and create the momentum that the next round of tours walks into. Once those visitors can see that offices are moving, and your team declines to negotiate on an office price, they understand that you do not need to discount, which is a great position to be in. Some of getting there is mindset: you have to stay confident about your team and about what you are offering through those early ramp-up days. Focus on the wins and on the good feedback you get, and if the feedback tells you something needs to be different, make the adjustment.
Specials can certainly help, and they help more when they carry some long-term value and still attract the right customers, the founding member type who belongs in your space and whose rate you will be able to increase once the initial deal is over. I had a client recently who wanted to discount and should not. They have a smaller space with not very many offices, they own the building, and their profit goals are not excessive, so the model works. They have inventory scarcity built into the plan and there is no other supply nearby. Their instinct that they simply have to lean into deals when they first open is not right, and what they should do instead is read the market and offer perks, bonuses, and the opportunity to be part of a smaller boutique community.
Re-run your projections every time you discount
If you make price adjustments, or discount an office because the interior offices are not moving, re-project your revenue. What happens otherwise is that you get busy closing deals and doing everything else it takes to open a coworking space, and you lose track of how your actuals compare to your projections. The original projection stays burned into your brain, so you go on believing the office revenue number in it still holds, even while your team is discounting.
If they are discounting every office by 20%, you are 20% away from your maximum recurring revenue on offices, and you need to know how that affects your ability to pay rent when it is due, start making debt payments, and pay yourself.
When I do a profitability analysis, I go through the rent roll, which is the line-by-line list of who is paying you what, and I look at every office at its revenue per square foot. Roughly 60% to 70% of the offices are at list rate. The rest come in at significant discounts, a good number of them at around half of list, because the sales team discounted early to get customers in the door and close new business.
Nobody has inched those offices back up to list rate since, so the revenue is not being maximized. Operators tell me they do not understand why they are not more profitable, and those discounted offices are a big part of the answer.
What discounting costs you at renewal
You may also be reducing the lifetime value of your original members, which might be okay as long as you know the trade-off. Heavy discounting can attract a customer who cannot actually afford the renewal rate, so when you try to move them back to market rate, they may look elsewhere.
If you did your homework on what competitors charge and how they are positioned against you on quality and location, you should not be far off on market rate, and you can get back to that rate once you have occupancy, because by then you are selling from a position of strength, with only so many one-person offices and so many two-person exterior offices left. Nobody is walking in and assuming they can get a deal because you are barely full.
Small increases are very palatable, which is why we recommend writing a 5% increase every year into the member agreement, so that it happens automatically on the back end without you having to have a conversation at all. Five percent is understandable to a member, and I see some operators doing 10% on an auto renewal rate. A 20% jump is a different matter, because it requires a negotiation, and some of those members will tell you they cannot afford it and leave, which means you have to replace them and you have to be prepared to do that.
You might think of all this as a year one problem, but renewals stagger, so the same challenge comes back in year two.
Strategy two: build three revenue streams at the same time
The second strategy is also challenging: grow at least three revenue streams at once, and put focus on all three. It is easy to fall into the trap of focusing on the offices, because it is true that the offices cover a big percentage of your fixed costs, but they will most likely not cover all of your costs, and they will certainly not create your profit margin. Offices should be about 60 to 70% of your revenue. The other streams fill in the rest, and that is often where your margin is created.
So sell the offices, and build your competency around meeting room revenue, event revenue, and mail revenue at the exact same time. Events may not be part of your business plan, and that is fine. But if event space is part of the plan, treat it with the same focus you give office space from day one.
Empty offices are the tangible thing, since you walk the hallway and see them, so your brain goes straight to how you fill them. You want systems that fill a few offices every month at the rates you built your model around, and then the same kind of systems and levers behind your meeting room, event, and mail revenue.
Mail is like investing in your 401k, in that you have to start early for it to compound. A mail plan is a lower dollar amount item than an office, but mail customers stay a very long time, and the revenue builds quickly because you are selling several plans a month.
You have to resource all of it leanly, because you cannot ramp expenses at the same rate you ramp revenue, and I see a lot of first-time operators overspend at the beginning on resources that do not deliver an ROI. I see that most often with marketing, where a lot of agencies are not cut out to support a local business like a coworking space, and it is not their area of expertise.
Hiring an agency is an expensive proposition on top of that, because agencies carry a lot of overhead and need to make margin on every employee they deploy, so you are paying a premium for one. There are times when that premium is worth paying, such as running Google Ads, which can be a lever that makes you money.
You are hiring a team to deliver the product: hospitality, onboarding, offboarding. But in the early days, while the space is still filling, a full-time team member has capacity left over, and the delivery side of the job takes a while to kick into gear. So do not make that first hire someone focused only on operations and hospitality. You can hold down the front desk while they go out and do the work:
- Attending chamber events and networking groups.
- Building referral relationships that send business to your mail service.
- Running email campaigns for the mail service and the meeting rooms.
If they have never done any of that before, they can get training on it. The expectation should be that they contribute to your growth, not that they are a cost line for delivering your service. Once you are ramped up and at a higher occupancy level, their time may be mostly taken up with delivery, and that is fine, but keep the expectation that they can also run a couple of special projects that help you grow.
Plan your discounts and build all three streams together
Plan for and limit your discounting, and if you are discounting, re-run your projections so that you know your revenue capacity and how long the terms run on those discounted members. Then build your revenue streams at the same time from the beginning rather than one at a time, or you will likely not hit the revenue mark you need to cover expenses, generate a profit, and pay yourself.
For the full conversation, listen to the full episode of the Everything Coworking podcast.
